Thankfully, Microsoft announced today that there will be an IE7, that it will designed for users of Windows XP, and that there will be a beta version by the summer. The denialist rhetoric of promising us an amazing new browser, but tethering it to Longhorn without throwing us a bone beforehand is now over.
IE's a great browser, and its security issues are more a byproduct of its ubiquity and role of high-value target than of deficient engineering. On the other hand, the product's been in maintenance mode for a long time, remaining largely unchanged (though not unpatched) for years. This has left Redmond incredibly vulnerable to attack by the Mozilla Foundation, or for that matter any programming team actually getting some substantive work done. All the FireFox team had to do was catch up to IE, throw in a few easily implemented features (sorry, I'm a bit jaded) like RSS integration and multiple tabbed browser windows, and yee haw! The Browser Wars are back, and the slow news days at CMP and IDG give way to a festival of provocative headlines and a new round of predicting Microsoft's demise.
So Microsoft is fighting back, as it should (and indeed as it should have done more proactively beforehand) and we'll get some new stuff in the browser. By the time it's all over, I suspect it will be a non-event. We'll all revert back to our anxiety over the actual release of all the stuff we saw at PDC in 2003 (Yukon, Whidbey, and Longhorn).
But Microsoft will have learned a lesson, or at least reinforced one already learned: don't rest on your past victories, or customers will start getting impatient and resentful. Even if it's just for effect, keep the new features coming. The whole PC culture is built around an attitude of entitlement toward new features, and people get very upset when their entitlements are taken away.